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Financial Services FLASHPOINTS January 2019

January 15, 2019Print This Post Print This Post

Michael L. Weissman, Levin Ginsburg, Chicago
312-368-0100 | E-mail Michael L. Weissman

This month we consider when a lender does not waive its right to arbitrate due to a delay in invoking it, when a lender does lose its right to arbitrate due to a delay in invoking it and prejudice to the borrower, and whether a loan servicer can report a payment default to a credit reporting agency after a foreclosure has been dismissed with prejudice.

Lender Did Not Waive Its Right To Arbitrate Due to Delay in Invoking It

In In re Trevino, No. 10-70594, 2018 WL 5994753 (Bankr. S.D.Tex. Nov. 14, 2018), the question was whether the noteholder and the mortgage servicer had waived their right to arbitrate their dispute with the mortgagors due to a delay in invoking it. The court ruled that they had not, saying, “[T]his is a case where Congress, the Supreme Court, and the Fifth Circuit have made it clear that the arbitration rider in the note must be enforced.” 2018 WL 5994753 at *1.

Mr. and Mrs. Trevino, who had acquired their home with mortgage financing, were forced to file for Chapter 13 bankruptcy relief on August 25, 2010. Six years into the Chapter 13, the Trevinos filed an adversary proceeding against the noteholder and loan servicer. The noteholder (Wilmington Savings Fund Society doing business as Christiana Trust) and loan servicer tried to dismiss it but failed. On June 21, 2018, they filed a motion to arbitrate. The deed of trust executed by the Trevinos included an arbitration rider that stated, “All disputes, claims or controversies arising from or related to the loan evidenced by the Note, including statutory claims, shall be resolved by binding arbitration, and not by court action.” 2018 WL 5994753 at *2.

The rider also contained the following conspicuous notice:



Between August 25, 2010, and June 21, 2018, while the Trevinos’ adversary complaint for abuse of process, breach of contract, and violation of statutory lending and real estate provisions was pending, Christiana Trust and the loan servicer responded with motions to dismiss, a motion for sanctions, a motion to delay discovery, answers to the original and amended complaints, and a consent to entry of a final judgment by the bankruptcy court.

When faced with the motion for arbitration, the Trevinos asserted that Christiana Trust and the loan servicer had lost their right to arbitrate by their delay in moving to invoke it.

To resolve that issue, the court first had to decide whether the loan servicer had a status that allowed it to invoke the arbitration rider. It ruled that it did, applying Texas law.

Then the court directed its attention to the waiver issue, phrasing it as follows:

A waiver is found when the party seeking arbitration meets two requirements: (1) the party claiming arbitration substantially invokes the judicial process, and (2) to the detriment . . . of the other party. . . . The party claiming that the right to arbitrate has been waived bears a heavy burden; there is a strong presumption against finding a waiver of arbitration, and any doubts must be resolved in favor of arbitration. 2018 WL 5994753 at *4.

Reviewing the record, the court found that Christiana Trust and the loan servicer had not invoked the judicial process because they had not sought a decision on the merits before seeking arbitration.

Insofar as prejudice to the Trevinos was concerned, the court said there were three factors to consider: delay; expense; and damage to a party’s legal position. The court ruled there was no prejudicial delay. Discovery in the case had been held in abatement, and the motion for arbitration was filed within four months after the abatement was vacated. The defendants had not asserted any counterclaims nor initiated any discovery nor filed any motion for summary judgment.

As to expense, the court said the Trevinos’ expenses were not great enough to warrant a finding they had been prejudiced. This was based on the fact that Christiana Trust and the loan servicer had not filed any counterclaims, taken any discovery (depositions, interrogatories, etc.), nor filed a motion for summary judgment, which would have required a substantial expenditure in time and legal fees.

Finally, on the issue of prejudice to the Trevinos’ legal position, the court ruled in favor of Christiana Trust and the loan servicer because there was no extensive pretrial activity or any trial preparation.

What’s the point? If a lender wishes to arbitrate a dispute with a borrower that has filed an adversarial lawsuit against it, the lender must avoid doing anything that constitutes seeking an adjudication on the merits or that forces the opponent to incur substantial legal expenses before the motion to arbitrate is made.

Lender Loses Its Right To Arbitrate Because of Delay in Invoking It and Prejudicing the Borrower

In sharp contrast to the preceding case, the United States Court of Appeals for the Seventh Circuit denied a bank credit card issuer the remedy of arbitration against a cardholder due to delay and prejudicial conduct toward the cardholder. Smith v. GC Services Limited Partnership, 907 F.3d 495 (7th Cir. 2018).

Francina Smith received a Sam’s Club credit card from Synchrony Bank in 2014. The contract underlying the credit card included an agreement to arbitrate.

At a later date, Synchrony hired GC to collect the unpaid balance due on the credit card account. On July 15, 2016, Smith responded with a class action case against GC claiming a violation of the Fair Debt Collection Practices Act (FDCPA), Pub.L. No. 90-321, Title VIII, as added by Pub.L. No. 95-109, 91 Stat. 874 (1977). GC responded with a motion to dismiss, making no mention of the arbitration agreement.

Smith filed an amended complaint, and, once again, GC responded with a motion to dismiss but made no reference to the arbitration agreement.

Because of discovery disputes, a discovery conference was held before a magistrate judge with GC being directed to provide account histories for putative class members.

On March 17, 2017, GC sent Smith a letter demanding arbitration. Smith refused to arbitrate. The court was not advised of GC’s demand to arbitrate.

GC filed an answer to the amended complaint, including affirmative defenses, on April 19, 2017. The answer did not mention the arbitration agreement. On June 19, 2017, the court denied GC’s motion to dismiss.

It was not until August 7, 2017, five months after the court had granted Smith’s motion to certify the class, that GC moved to compel arbitration. The district court ruled that GC had waived its right to arbitrate due to lack of due diligence in asserting that right. On appeal, that ruling was affirmed.

Initially, the appellate court clarified the distinction between “forfeiture” and “waiver”: “Forfeiture ‘is the failure to make a timely assertion of a right,’ while ‘waiver is the “intentional relinquishment or abandonment of a known right.” ’ ” 907 F.3d at 499, quoting United States v. Olano, 507 U.S. 725, 123 L.Ed.2d 508, 113 S.Ct. 1770, 1776 – 1776 (1993). Clearly, GC’s conduct fell into the forfeiture category. But since virtually everyone calls a forfeiture a “waiver,” that is the term the court used in its analysis.

The court applied two tests: (1) Did GC act inconsistently with the right to arbitrate? (2) Would Smith be prejudiced by arbitration?

On the first point, the court noted:

  1. GC did not send a letter demanding that Smith arbitrate until eight months after her lawsuit was filed.

  2. GC waited five months after the letter was sent before moving to compel Smith to arbitrate.

  3. Even if, as GC contended, the delay was due to GC not having discovered the arbitration agreement, the delay could not be excused because customer credit card agreements commonly include arbitration agreements.

  4. Federal regulations require credit card issuers to post their agreements online.

The court also went on to state that even if GC did not discover the arbitration agreement until March 2017, its conduct after that date was not consistent with an intent to arbitrate; i.e., GC filed an answer but made no mention of the arbitration agreement.

Furthermore, apart from the delay, the appeals court said GC at no point had notified the district court that it intended to move to compel arbitration even after it had made its demand to arbitrate on Smith. At that point, GC’s motion to dismiss and Smith’s motion for class certification were pending. A favorable ruling on arbitration for GC would have eliminated any need for consideration of both motions. In the words of the court, “GC . . . never requested that consideration of the motions be stayed or even mentioned the arbitration agreement in its briefing.” 907 F.3d at 500.

Although postulating that prejudice “is not necessary to a finding of waiver,” the court said it was a relevant factor. 907 F.3d at 501. It pointed to the fact that GC had concurred in the district court’s consideration of an issue pivotal to Smith’s case. Having lost that issue, the court observed that “GC Services sought to erase Smith’s successes.” Id.

What’s the point? These two cases on arbitration with sharply different results are explicable by the differing facts. The takeaway: Delay in asserting arbitration rights is not necessarily fatal. But if there is a bona fide desire for arbitration, that should be asserted early in the proceedings and before there has been intervening ruling on part or all of the merits of the case.

Loan Servicer Not Prevented from Reporting Loan Default to Credit Reporting Agency by Dismissal of Mortgage Foreclosure with Prejudice

Bauer v. Roundpoint Mortgage Servicing Corp., No. 18 C 3634, 2018 WL 5388206 (N.D.Ill. Oct. 29, 2018), raised the question whether a mortgage servicer violated a variety of state and federal laws by reporting an unpaid debt to a credit reporting agency at a time when the security for the debt could not be reached through judicial means.

In February 2006, Bauer executed a note and mortgage for $194,448 to acquire a home. Later, Bauer defaulted. In November 2013, the mortgagee attempted foreclosure but voluntarily dismissed the case. A second foreclosure was voluntarily dismissed in June 2015. And in March 2016, a third foreclosure was begun. It was dismissed with prejudice in June 2017. (This was based on Illinois’ “single refiling rule,” 735 ILCS 5/13-217, which allows only one more foreclosure action to be filed timely after the first one has been voluntarily dismissed. 2018 WL 5388206 at *3.) No appeal was taken.

Thereafter, Roundpoint, the loan servicer, sent Bauer 11 billing statements with steadily increasing amounts, a notice of default and intent to accelerate, and a notice of default stating the amount to cure the default and, further, that if the default was not cured by August 23, 2017, Roundpoint would initiate foreclosure.

Bauer responded with a notice of error advising Roundpoint it was trying to collect an uncollectible debt. Undeterred, Roundpoint sent Bauer a letter indicating the monthly amount due as of September 1, 2011, of $1,824.64 plus all subsequent monthly payments and fees. The unpaid principal amount was stated as $178,949.22. Bauer’s position was that Roundpoint had not addressed the fact the loan was unenforceable. Roundpoint again tried to collect, and Bauer responded with another notice of error.

At this juncture, Roundpoint’s attorney advised Bauer that the voluntary dismissal of the second foreclosure did not extinguish the debt. And Roundpoint continued to try to collect the debt, including forwarding negative information to credit reporting agencies. Bauer objected because his credit was adversely affected.

The first question the court considered was whether dismissal of the third foreclosure action canceled the debt. This was in the context of Bauer’s claims that

  1. the Truth in Lending Act (TILA), Pub.L. No. 90-321, Title I, 82 Stat. 146 (1968), was violated because the noteholder was sending false and misleading statements;

  2. the FDCPA was violated by false representations in the billing statements and statements to credit reporting agencies;

  3. the Real Estate Settlement Procedures Act of 1974 (RESPA), Pub.L. No. 93-533, 88 Stat. 1724, was violated because there were no substantive responses to his notices of error;

  4. the Illinois Consumer Fraud and Deceptive Business Practices Act (Consumer Fraud Act), 815 ILCS 505/1, et seq., was violated because of the false claims being made; and

  5. the Fair Credit Reporting Act (FCRA), Pub.L. No. 90-321, Title VI, as added by Pub.L. No. 91-508, Title VI, 84 Stat. 1128 (1970), was violated by disclosure of incomplete or inaccurate information.

The court’s response was summed up in this comment: “Although the single refiling rule prevents the defendants from pursuing another foreclosure action, extinguishing their legal remedy, the rule does not extinguish the right to the underlying debt — that remains. . . . [A] creditor retains some right to payment, even if its remedy is no longer a legal one but a moral one.” 2018 WL 5388206 at *3. The court also noted that “a debt once-unenforceable can become enforceable again under certain circumstances,” such as “if [a debtor] makes a partial payment or even just a promise to make a partial payment” or violates a due-on-sale clause in the mortgage. Id.

The court said the noteholder had not violated TILA because the monthly billing statements sent to Bauer were truthful — the debt was not extinguished. As to the violation of the FDCPA, Bauer lost on all aspects of that allegation except for the loan servicer’s threat to accelerate the debt and foreclose judicially.

On the violation of RESPA, the court said Bauer’s reading that the third foreclosure action was “a final adjudication on the mortgage and note” was erroneous and resulted in a ruling against Bauer. 2018 WL 5388206 at *5.

With respect to the Consumer Fraud Act, the court decided to dismiss some of Bauer’s allegations but not all. The allegations that the loan was enforceable and the home was subject to foreclosure were held to be enough to allow Bauer to proceed on that count.

Finally, as to the FCRA, the court ruled against Bauer, saying: “The only false statements alleged to have been made to the credit reporting agencies pertain to the delinquent debt. That debt was not extinguished, so the information regarding it was complete and accurate, and no amount of investigation could have proven otherwise.” 2018 WL 5388206 at *7.

What’s the point? If this case were appealed, there is little likelihood Bauer would succeed on the surviving allegations. But it does point up the danger to lender in threatening to foreclose when that remedy is no longer available.

For more information about financial services, see COMMERCIAL AND INDUSTRIAL LOAN DOCUMENTATION — 2018 EDITION. Online Library subscribers can view it for free by clicking here. If you don’t currently subscribe to the Online Library, visit www.iicle.com/subscriptions.



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